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Tax planning for business owners

April 18 2017Eamonn DalyTax planning for business ownersBusiness property relief (BPR) is a relief from inheritance tax (IHT) at either 50% or 100% on trading business interests or assets owned by the person claiming the relief. This relief applies to business property either transferred during a person’s lifetime, or on their death, providing they have owned them for the preceding two years.
Entrepreneur’s relief (ER) is a relief which operates to reduce the capital gains tax (CGT) payable on the sale or transfer of a business. The relief reduces the rate of CGT to 10%. This is subject to a lifetime cap of £10m of lifetime gains.
Corporate/partnership structure
There are a number of ways in which you can set up or re-structure a business for tax efficiency and in order to utilise the available reliefs:
A company share structure can be designed to provide employees/family members with incentives. This can be both tax efficient and help to minimise costs for both shareholders and employees while the company is operational and on any future disposal.
BPR would not be available if surviving shareholders/partners were obliged to buy out a deceased shareholder/partner’s interest in the business under the company’s articles of association or the partnership agreement.Instead cross purchase and sale options arising on death should be in place, possibly backed by life assurance, to provide funds to buy shares in order to maintain the availability of BPR.
Business assets must be owned by the partnership or the company to qualify for 100% BPR. If the assets are owned by either the partners or a controlling shareholder personally, they will attract BPR at 50%.A partner or shareholder disposing of both a personally held asset used in the business and at least 5% of their interest in the business (within the relevant time limits) may benefit from ER on the gains made on the sale. ER would not be available on an asset sale if it were held by the partnership or company directly and the business continued after the sale.
Through the use of directors’ loan accounts, cash can be withdrawn from a company without income tax and national insurance consequences.However, BPR would not be available on the value of the loan, unless it were converted to share capital before death or transfer.
BPR may be lost if the business operations shift from wholly or mainly trading to investment or property letting.In order to be able to utilise any BPR available on the trading business, the investments or properties would need to be separated out from it into another business. There may also be good commercial reasons for doing this so that non-trading assets are not available to meet potential liabilities arising from the trading activities.
Conversely where there are separate trading and investment companies owned, BPR would only be available for the trading company even if it constituted more that 50% of the whole. In this circumstance by incorporating a holding company to own 100% of the trading company and the investments directly, the whole group might attract 100% BPR.This structure may though have implications for the availability of ER on a future sale: ER would not be available if the value of the non-trading assets exceeded 20% of the value of the business. If a sale is intended it may therefore be more tax efficient for the businesses to be kept separate in order to preserve the availability of ER.
Managing your business tax efficiently
Disposing of the business
Where a business is sold and cash proceeds, or other non-BPR qualifying assets, are received, such proceeds would not benefit from BPR in the seller’s estate.
Gifts of shares or interests in the business, which qualify for BPR prior to a sale, to other individuals or a trust, would benefit from BPR. Provided that the person transferring the asset survives 7 years from the date of the transfer there would be no IHT implications for their estate and more than the usual IHT threshold (£325,000 per donor) could be transferred to a trust without an immediate tax liability.
However, ER is often the main tax driver in a sale and for it to be available to the recipient of the gift, they would need to meet the qualifying conditions for at least one year (two years for disposals from 6 April 2019) prior to the disposal, unless they already qualified in their own right.
Often then, the original owner will want to retain the assets until sale. It may though still be possible to benefit from BPR after an asset has been disposed of where there is an acquisition of a further qualifying asset within the relevant time limits. The later asset acquired could then be transferred to an individual or trust and the gift would benefit from BPR.
Personal affairs
A business owner can crystallise any BPR available on their death through the incorporation of a trust in their will. The will could be drafted tax efficiently to benefit a surviving spouse or civil partner, taking into account the likelihood, or not, of the continuation of the business.
Business owners should also consider preparing an Lasting Power of Attorney specifically to cover their business interests and protect the tax position in the event of them being unable to make business-related decisions.
Conclusion
There are a number of ways business owners can mitigate their tax liabilities both during their lifetime and on their death. Our Private Wealth and Tax team can discuss the options available to you and provide bespoke advice tailored to your needs and personal circumstances. If you would like to discuss any of the above further, please get in touch with us, using the contact details below and we will be happy to help.

Business property relief (BPR) is a relief from inheritance tax (IHT) at either 50% or 100% on trading business interests or assets owned by the person claiming the relief. This relief applies to business property either transferred during a person’s lifetime, or on their death, providing they have owned them for the preceding two years.

Entrepreneur’s relief (ER) is a relief which operates to reduce the capital gains tax (CGT) payable on the sale or transfer of a business. The relief reduces the rate of CGT to 10%. This is subject to a lifetime cap of £10m of lifetime gains.

Corporate/partnership structure

There are a number of ways in which you can set up or re-structure a business for tax efficiency and in order to utilise the available reliefs:

A company share structure can be designed to provide employees/family members with incentives. This can be both tax efficient and help to minimise costs for both shareholders and employees while the company is operational and on any future disposal.

BPR would not be available if surviving shareholders/partners were obliged to buy out a deceased shareholder/partner’s interest in the business under the company’s articles of association or the partnership agreement.

Instead cross purchase and sale options arising on death should be in place, possibly backed by life assurance, to provide funds to buy shares in order to maintain the availability of BPR.

Business assets must be owned by the partnership or the company to qualify for 100% BPR. If the assets are owned by either the partners or a controlling shareholder personally, they will attract BPR at 50%.

A partner or shareholder disposing of both a personally held asset used in the business and at least 5% of their interest in the business (within the relevant time limits) may benefit from ER on the gains made on the sale. ER would not be available on an asset sale if it were held by the partnership or company directly and the business continued after the sale.

Through the use of directors’ loan accounts, cash can be withdrawn from a company without income tax and national insurance consequences.

However, BPR would not be available on the value of the loan, unless it were converted to share capital before death or transfer.

BPR may be lost if the business operations shift from wholly or mainly trading to investment or property letting.

In order to be able to utilise any BPR available on the trading business, the investments or properties would need to be separated out from it into another business. There may also be good commercial reasons for doing this so that non-trading assets are not available to meet potential liabilities arising from the trading activities.

Conversely where there are separate trading and investment companies owned, BPR would only be available for the trading company even if it constituted more that 50% of the whole. In this circumstance by incorporating a holding company to own 100% of the trading company and the investments directly, the whole group might attract 100% BPR.

This structure may though have implications for the availability of ER on a future sale: ER would not be available if the value of the non-trading assets exceeded 20% of the value of the business. If a sale is intended it may therefore be more tax efficient for the businesses to be kept separate in order to preserve the availability of ER.

Managing your business tax efficiently

Disposing of the business

Where a business is sold and cash proceeds, or other non-BPR qualifying assets, are received, such proceeds would not benefit from BPR in the seller’s estate.

Gifts of shares or interests in the business, which qualify for BPR prior to a sale, to other individuals or a trust, would benefit from BPR. Provided that the person transferring the asset survives 7 years from the date of the transfer there would be no IHT implications for their estate and more than the usual IHT threshold (£325,000 per donor) could be transferred to a trust without an immediate tax liability.

However, ER is often the main tax driver in a sale and for it to be available to the recipient of the gift, they would need to meet the qualifying conditions for at least one year (two years for disposals from 6 April 2019) prior to the disposal, unless they already qualified in their own right.

Often then, the original owner will want to retain the assets until sale. It may though still be possible to benefit from BPR after an asset has been disposed of where there is an acquisition of a further qualifying asset within the relevant time limits. The later asset acquired could then be transferred to an individual or trust and the gift would benefit from BPR.

Personal affairs

A business owner can crystallise any BPR available on their death through the incorporation of a trust in their will. The will could be drafted tax efficiently to benefit a surviving spouse or civil partner, taking into account the likelihood, or not, of the continuation of the business.

Business owners should also consider preparing an Lasting Power of Attorney specifically to cover their business interests and protect the tax position in the event of them being unable to make business-related decisions.

Conclusion

There are a number of ways business owners can mitigate their tax liabilities both during their lifetime and on their death. Our Private Wealth and Tax team can discuss the options available to you and provide bespoke advice tailored to your needs and personal circumstances. If you would like to discuss any of the above further, please get in touch with us, using the contact details below and we will be happy to help.

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